Excess Housing Continues to Weigh Upon Home Prices – But Nobody Knows How Much Supply There Really Is

The fundamental issue facing the housing market is supply and demand – or more specifically, excess supply and the lack of demand.  This imbalance is causing home values to fall, and has been doing so since the expiration of the first time home buyer tax credits last year. The tax credits artificially buoyed prices for a brief time at a high cost to taxpayers, accomplishing almost nothing as home values are now below their 2009 lows.

Let’s take a look at what some of the more prominent home price indices have reported recently:

• The CoreLogic Home Price Index for March (which is an average of January, February, and March) showed a 7.5% year-over-year price decline, with declines accelerating from 5.8% y-o-y in February.
• The FHFA Home Price Index (which is only purchases) was down 1.6% in February, and down 5.7% year-over-year.
• The S&P/Case-Shiller Home Price Index for February (which is an average of January, February, and March) showed a 3.2% year-over-year decline for the 20-city index, down 32% from the peak of the market (within a hair’s breadth of a double dip).
• The RadarLogic RPX Home Price Index is at the lowest point since March of 2003, and is 36% below it’s peak in mid-2007.

The different indices show different numbers due to different methodologies.  When they all point in the same downward direction, I think we can feel confident that at least the trend is accurate.  Almost all of them cite supply and demand as the reason that home values are continuing to fall.  What I find interesting is that nobody really seems to know how much excess supply there is, which makes it difficult to gauge how long it will take to be absorbed given current demand.  This makes it really hard to say how much further home prices have to go before they hit bottom.  Tom Lawler, a housing expert who writes over at CalculatedRisk addressed this issue today:

A few weeks ago Goldman Sachs’ analysts made headlines by arguing that the “excess” supply of housing, or actually the number of US housing units sitting vacant “above and beyond normal seasonal and frictional vacancies,” was “about” 3.5 million. This week Deutsche Bank analysts estimated that at the end of 2010 there were about 1.2 million “excess” vacant housing units in the US. Both sets of analysts relied heavily on data “provided” by the US Bureau of the Census in deriving their “estimates.” And, to the best of my knowledge, neither set of analysts was comprised of imbeciles. Yet jiminy cricket, those are pretty huge differences with massively different implications about the prospects for the housing markets and home prices over the next few years!!!!! And the major reasons for these differences? You guessed it, massively disparate sets of data from different areas of the Census Bureau on US housing!!!!

Lawler traces the fundamental problem to the various official datasets produced by the government, as well as the fact that there is little, if any guidance as to which data should be used to estimate housing supply (I definitely recommend reading the Lawler article for more color on this issue).  That we are unable to accurately estimate this crucial data is hugely problematic.  It means that any estimate of how much further housing prices will fall, and when the market will bottom is more or less an educated guess.  At the very least it makes the signal-to-noise very low.